DRIVERS OF PRIVATE SAVING IN SUB-SAHARAN AFRICAN COUNTRIES

Abstract

(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONThe role of saving in the growth process has long been recognized. Saving creates capital formation which is a catalyst in the growth process. For instance, the Solow-Growth model predicts that a rise in saving rate and productivity improvement are associated with an increase in per capita income. Indeed, one of the explanations to the dismal growth performance in Sub-Saharan Africa, particularly in 90s, was the low saving and investment rates (Shawa et al., 2012). The positive link between saving and growth is also empirical. Estimated growth functions have established positive significant saving coefficients. In this direction World Bank (1993) established that countries with higher saving rates grew at a faster rate than those with low saving rates. Despite the recognised role that saving rates play in explaining economic growth, empirical evidence is less clear about the drivers of saving, particular private saving in Sub-Saharan Africa.The objective of this paper therefore is to empirically estimate a dynamic model of private saving for 39 Sub-Saharan African countries and examine the main drivers of private saving. The present work adds distinct value to earlier work on saving behaviour. First, estimating a private saving function recognises the role the private sector plays in the growth process, which is mostly ignored in economic analyses. Secondly, past work on saving has concentrated on testing the prediction of a single theory. Recognising that no single theory can fully explain private saving behaviour, we employ an encompassing model to allow a variety of potential determinants. Thirdly, instead of using a diverse group of developing countries that combine Sub-Saharan African countries with other Less Developed countries, we estimate a private saving function for only Sub-Saharan African countries to capture the region's unique characteristics. Some past empirical works have found marked differences in results of Sub-Saharan African panels and other LDC panels (Mwega, 1997). Finally, considering that static panels neglect the lagged variable effects of the left-hand side variable, the paper uses dynamic panels to take full account of the persistent nature of the private saving rate.The rest of the paper is organized as follows: Section 2 gives some brief trends, Section 3 surveys the literature, and Section 4 presents the methodology. Results are discussed in Section 5, and Section 6 concludes the paper.2. BRIEF TRENDS IN SAVING, INVESTMENT, GDP GROWTH AND CURRENT ACCOUNT BALANCESaving rates have generally trailed investment rates in Sub-Saharan Africa. Huge gaps existed in the 1980 and 1990s. Measured as a per cent of GDP, Gross National Savings averaged only 14.9 compared to 23 per cent of investment in the 1980 decade (Table 1). The gap widened further in the 1990 decade with Gross National Savings accounting for only 14 per cent of GDP compared to 23.5 per cent of investment. Good progress was made in the 2000s where Gross National Saving Rates increased and converged towards investment rates. The unpalatable implication of the savinginvestment gap is the dependence on foreign capital for development.Perhaps confirming the results of World Bank (1993), it can be observed that decades of low saving rates are associated with low GDP growth rates in Sub-Saharan Africa and decades of high saving rates are associated with higher income growth (Table 1). GDP grew at below 3 per cent between 1980 and 1999, decades of relatively low Gross Saving Rates. In the 2000s, on the other hand, increases in Gross National Saving rates at 19.5 per cent (2000-2009) and 21.4 per cent (2010-2015) were associated with higher income growth rates at 5.8 per cent and 5.0 per cent, respectively.When yearly observations are taken into account (Figure 1) the saving-investment gap is further demonstrated. It is shown that for all the years between 1980 and 2000, Investment was constantly higher than Gross National Saving with 1989 registering the highest gap (23 per cent). …